Weekend Reading for Financial Planners (Apr 12-13)

Executive Summary

Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with a strong response from CFP Board chair Ray Ferrara to last week’s rather harsh editorial from Financial Advisor magazine’s Evan Simonoff, focusing on all the ways that CFP Board has been growing successful in recent years, and suggesting that many of the criticisms being levied at the organization are more about what the organization once was, rather than what it actually is today.

From there, we have several practice management articles, including a good overview of what advisors should know and pay attention to regarding this week’s widespread “Heartbleed” internet security bug, a look at how the SEC is turning up its attention on the growing space of hybrid- and dual-registered advisors, a review of the new software company Oranj which provides website and client “app” tools for advisors, some guidance about key areas that firms should focus on if they’re planning to grow “inorganically” (e.g., via mergers and acquisitions), and a good discussion of the other key factors to consider when selling your practice besides just the valuation multiple (many of which can impact the sale even more!).

We also have a trio of more technical planning articles this week, from a good list of 24 Social Security “quirks” and planning tricks (or traps!), to a nice discussion from the New York Times about the current landscape of college financial aid and the increasing distinction between how public and private colleges determine “need” and available aid, to an overview of the current legal landscape when planning for “digital assets” and prospective legislation called the Fiduciary Access to Digital Assets Act (FADAA) that may pass later this year.

We wrap up with three interesting articles: the first looks at how, in the end, having a good website is the key to succeeding in getting clients online, and that trying to get active with social media isn’t going to yield much of a result if it’s not paired together with a website that can actually convert visitors to true prospects and eventually to clients; the second provides a great reminder that, as long as we’re irrational human beings, there is a limit to what a “robo-advisor” or any automated solution can really accomplish, though advisors may still be underestimating how well such tools can execute what they are designed to do; and the last is a big announcement this week from “robo-advisor” Betterment that it is ‘breaking ranks’ with the other robo-advisors and launching Betterment Institutional, an offering to partner with and provide a version of its platform directly to RIAs, a big step that begins to blur the line between where a robo-advisor will end and a human advisor will begin.

And be certain to check out Bill Winterberg’s “Bits & Bytes” video on the latest in advisor tech news at the end! Enjoy the reading!

Weekend reading for April 12th/13th:

Not Your Grandfather’s CFP Board – The CFP Board’s chair Ray Ferrara has issued the organization’s response to last week’s controversial and highly critical editorial from Financial Advisor magazine’s Evan Simonoff (as reviewed in last week’s Weekend Reading) suggesting that the CFP Board’s leadership is using the organization’s money irresponsibly and lavishly. The key point of Ferrara’s response is that many of the criticisms being levied against the CFP Board are reflections of the organization years ago, and not how it is being run and operated today. Ferrara highlights many of the CFP Board’s recent accomplishments (some directly contradicting points that Simonoff made), including: that the CFP Board is growing (up 27% to nearly 70,000 CFP certificants since 2007, accomplished despite the overall decline in the number of advisors since then); initiating the public awareness campaign that was supported at launch by 94% of CFP certificants and funded by an annual fee increase that has been going exclusively to direct expenses of the campaign (and achieving its four-year public awareness goals in just the first two years); participating in public policy advocacy, especially in its leadership of the “game-changing” study conducted by the Boston Consulting Group that was a significant factor in the defeat of legislation that would have likely led to FINRA as the SRO for investment advisers; increasing the number of CFP Board registered programs by 10% in the past four years (including a 33% increase in baccalaureate programs) and the issuance of the Financial Planning Competency Handbook; reforming its enforcement policies, including the introduction of anonymous case histories, sanction guidelines, and the addition of public members to the Disciplinary and Ethics Commission (DEC). And notably, all of this was accomplished with 20% fewer staff than the CFP Board employed 10 years ago. Ferrara also disputes Simonoff’s allegations that the CFP Board has been irresponsible with its spending, though without a lot of further detail, beyond noting that Simonoff incorrectly reported Keller’s compensation and that the CFP Board has a “CEO Oversight Committee” supported by an external compensation consultant to set appropriate compensation, and that although CFP Board leadership is involved with the Financial Planning Standards Board (FPSB) outside the US that any travel by CFP Board participants is “consistent with corporate travel policies that ensure costs are appropriate and reasonable.” The bottom line: Ferrara is making the case that, notwithstanding the problems of CFP Board’s past, today’s organization is “not your grandfather’s CFP Board” (an observation I made as well in a similarly titled article two years ago).

The Heartbleed FAQ For Financial Advisers – From the blog of advisor technology consultant Bill Winterberg, this article highlights the big technology news this week: the discovery of the “Heartbleed” security flaw, and what advisors should know (and do) about it. So what is “Heartbleed”? Basically, it’s a software bug in a piece of software called OpenSSL, which is actually used to establish secure connections for a large number of web-based services (when you see the green padlock icon in your web browser’s address bar, it’s probably some kind of OpenSSL protocol). So what should you do about it? The first step is to check out if the site(s) you use are vulnerable (Winterberg suggests this Heartbleed testing site); if they are, you need to change your password, but don’t log in there until you’ve received an update from the site that the bug has been fixed (otherwise you just risk making your new password vulnerable). You should probably also change your password on any other sites that use the same password as one on a Heartbleed-exposed site, just in case your password is now out there. In the meantime, Winterberg strongly suggests activating multi-factor authentication on your sites wherever possible. What is multi-factor authentication? It’s based on the idea that a site is much more secure if logging in is based on at least two out of three “factors”, which include Something You Know (e.g., a username and password or PIN), Something You Have (e.g., an ATM card, security token, or smartphone), and/or Something You Are (e.g., a fingerprint or retina). This way, even if a hacker (or Heartbleed) compromises your password (something you know), they don’t have the other factor, and still can’t breach your account. Winterberg also cites some suggestions on how you can change your browser settings to enforce more stringent security settings for your online sessions with (need-to-be-secure) sites you visit. And of course, any of this advice applies equally to your clients as well!

Dually Registered Advisors In SEC Crosshairs – The hybrid- or dual-registered practice has been the fastest growing part of the advisory world (still smaller than independent RIAs, but growing at a faster pace according to recent data); the dual-registration trend allows firms to offer fee-based advisory services for clients who want investment management, but retain a brokerage license for clients who still need certain insurance or other commission-based product solutions, thereby theoretically offering a ‘more comprehensive’ solution for whatever clients may need. However, the SEC warned earlier this year that it’s going to be applying more scrutiny to dual-registered advisors, as these converging channels are subject to different laws and statutes and different standards (fiduciary vs suitability), and the SEC is concerned that clients may be steered to one side or another based more on the advisor’s interests than the client’s. For advisors that already hold themselves to the higher standard, the distinction may be a moot point; nonetheless, for those who offer both, the SEC has even raised the question of whether fiduciary placing clients into asset-based accounts should be directing clients to commission-based brokerage platforms instead, if there isn’t anticipated to be much of any trading anyway, in what is now being dubbed “reverse churning” (i.e., if there was no trading, would it have been cheaper to just place assets into a brokerage account without an AUM fee!?). The concern is accentuated by the fact that the SEC acknowledges consumers don’t seem to understand the differences between brokers and RIAs, though given the SEC’s staffing limitations on enforcement, it’s still not clear how much of a crackdown will really happen in the near term.

The Advisor’s Technology Swiss Army Knife – In Morningstar Advisor, technology consultant Bill Winterberg reviews Oranj, a multi-purpose platform designed to help advisors with a number of key tasks in an integrated one-stop location, from website publishing and analytics to business analytics to prospecting, as well as offering client portals, electronic document vaults, and more. As with many Advisor tech solution, the Oranj platform was built by a financial advisor who developed many of the tools for his own business, and then adapted them to a third-party platform for other advisors to work with. The Oranj offering actually comes in two varieties: Oranj Cloud, and Oranj App. The Oranj Cloud service is designed to solve the multi-step challenge for advisors who have to post new content to their website, archive it for compliance purposes, check Google Analytics to see how much it’s being viewed/used, offer a mailing/sign-up list, and then see how that mailing list grows/performs over time; all of this can be done right now, but requires multiple providers and solutions, while Oranj Cloud aims to deliver it all together, from a basic CRM to track marketing engagement to a complete hosted website solution (including integrated compliance archiving, an email marketing campaign manager, and an activity and analytics reporting module). What Oranj Cloud is for advisors, Oranj App is intended to be for the clients; this consumer-facing side of the offering provides an advisor-branded web portal for clients, including some account aggregation and basic goal tracking tools, and a client vault. Pricing for Oranj Cloud starts at $200/month per user, with bundled Oranj Cloud + App pricing starting at $250/month per user (for up to 20 households using Oranj App). As Winterberg notes, many/most of these solutions are available individually already, but that can leave data compartmentalized; the advanced of Oranj is the potential for all of this data to be integrated and synchronized across the different components of an advisor’s online presence and marketing.

8 Keys to Inorganic Growth for Advisory Firms – As advisory firms grow larger, more and more are looking to “inorganic” growth strategies like recruiting advisors who have an existing client base, or developing a Mergers & Acquisitions (M&A) plan to merge/buy other independent advisors. Yet the challenge is that as advisory firms have been growing, many of them all want to do this same thing; in fact, at many conferences, there are still far more advisors looking to buy firms than there are those ready to sell! Unfortunately, though, practice management consultant John Furey notes that the odds most advisors succeed in such inorganic strategies is actually quite low. For those who nonetheless wish to pursue such strategies, Furey offers up a series of 8 key guiding principles/tenets that acquirers should bear in mind before attempting to go down the M&A path: 1) have a clear value proposition (not just why should the acquiree join your firm, but why join your firm rather than all the other successful advisors also asking to buy them?); 2) identify your ideal advisor (the more specific you are, the narrower your market may be, but the easier it will be to align your value proposition to what the seller might be looking for); 3) define your support platform (what will you provide, in terms of office space, staffing assistance, marketing budget, technology, research, etc.); 4) think through your compensation/equity plan (you should know what deal you’re planning and willing to offer before ever sitting down at the negotiating table!); 5) focus on your own human capital strategy and culture (advisors want to join firms that are already implementing best practices); 6) show your transition capabilities (are you prepared to make the investments necessary to ensure a smooth transition?); 7) be ready to really market (as with any business development, you’re going to have to talk to a lot of advisors and share your marketing materials to find the right fit); 8) dedicate appropriate resources (most successful M&A firms have full-time staff dedicated to the effort). The bottom line: inorganic growth strategies sound great, but make sure you’re really ready to make the investments necessary to make it succeed, or consider another path instead.

5 Issues Advisors Must Consider When Selling Their Practices – This article by advisor search/recruiting consultant Mark Elzweig looks at some of the important nuances advisors should consider if they’re thinking about selling their practice, beyond just the popular question of [revenue] multiples; as always, the devil is in the details, and focusing on top-line multiples without a look at the terms can be highly misleading (or outright lead to a bad deal).While multiples are still important, the other key areas in the fine print terms that Elzweig suggests to focus on, beyond just the multiples, are: 1) cash down payments (downpayments typically range from 10% to 40%, and the less involvement sellers have the more they typically want up front); 2) adjustable rate notes (the note rate may float not only with general interest rates, but also with the attainment of certain transition or post-acquisition growth goals, especially if the seller stays involved after the sale); 3) earnouts (where the sale price is contingent on the performance of the practice after sale, again often used to keep the seller involved and incentivized to make sure the transition goes smoothly); 4) taxes (capital gains treatment for sellers can result in unfavorable ordinary income treatment for buyers, so be aware this is a potential bargaining chip). In the extreme, you can even find that deals at 3x multiples with low downpayments, long earnouts with high thresholds, extended employment contracts, and unfavorable taxation, may net the seller less than a more modest deal at “only” a 2X multiple, so be certain to focus on the whole deal.

24 Social Security Quirks That May Help Or Hurt Clients – In Financial Advisor magazine, financial planner Dan Moisand shares an interesting list of Social Security “quirks” that advisors should be aware of when doing Social Security planning and implementing strategies with clients. Highlights from the list include: #2 – the effective return a couple makes by delaying Social Security is easily among the best available for a low risk ‘investment’; #3 – if clients regret starting when they did, then can still get a “do-over” within 12 months of when they start; #4 – clients who already started early can still suspend benefits at full retirement age and earn delayed retirement credits (dubbed the “start stop start” strategy); #7 – if a client starts benefits after full retirement age but before age 70, the monthly check won’t reflect the full delayed retirement credit until next January; #9 – spousal benefits are often described as “half your spouse’s retirement benefit” but it’s actually (just) half of the full retirement age benefit, so it can actually be less than half of the delayed benefit amount; #12 – still working in your 60s and beyond can increase your benefits (by increasing your average indexed monthly earnings), but watch out for the earnings test for early benefits prior to full retirement age; #13 – clients who do lose benefits to the earnings test do get an “adjustement to reduction factor” at full retirement age that undoes some of the prior early benefits election (though spousal or child benefits lost to the earnings test are permanently lost); #16 – if the client had family later in life and is collecting retirement benefits and has young children, then child benefits are available through age 17 (or up to age 19 if still in secondary school); #24 – for younger folks, the Social Security site often underestimates future benefits, as it apparently does not assume future inflation/real wage growth in its projections.

What You Don’t Know About Financial Aid (but Should) – From the New York Times, this article provides a good overview of the current state of college financial aid. The challenge is that the whole system itself is still incredibly complex; because each college puts their own aid package together, it can be very difficult to compare and contrast, and although there are some online tools to help like the government’s own College Navigator, they are very underutilized (and with a wide array on the internet, some tools are better than others). Congress is considering a proposal that would require colleges to use a uniform financial aid letter, making it easier to compare and contrast, but in many cases families are still surprised by how the numbers turn out. The standard form is the Free Application for Federal Student Aid (FAFSA), which determines eligibility for low-income Federal programs like Pell grants and subsidized student loans; however, private colleges typically require another form, called the CSS/Financial Aid Profile, and may use the CSS results over FAFSA, blend them together, or add their own factors to the mix. In the end, families making about $60,000 are often expected to pay more than 20% of earnings, and those making $100,000 to $200,000 may be expected to allocate as much as half of their income to college under the private formulas; in addition, the formulas often expect about 5% of the value of parental assets, plus 20%-25% of students’ assets, though private schools vary as to what is even included in “assets” in the first place (e.g., some include home equity, others including the FAFSA formulas do not). The financial pressures since 2008 have further exacerbated the situation; some schools have been modifying their formulas, while others have been moving away from need-blind admissions (i.e., need for aid is now being considered for admission itself at some schools). Even for schools that claim they are need-blind, some education consultants advise not to check the box for “intends to apply for financial aid” on the college Common Application, and instead wait until being admitted to give the college an indication about a need for aid. Even for need-blind schools, some students are faced with a “gap” – the school may accept them, acknowledge their need, but provide less in financial aid than is necessary to cover the need, leaving a ‘gap’ that families must fill themselves (or decline college after being admitted). It’s also important to realize that increasingly, the “aid” being offered is not actually reduced tuition at all, but simply loans that must still be paid back, or a significant amount of part-time work-study jobs.

Understanding Proposed Legislation For Digital Assets – In the Journal of Financial Planning, this article looks at the current landscape in planning for digital assets, which includes everything from email and blogs to social media accounts and online photo albums, not to mention handling online banking and financial accounts. However, notwithstanding the fact that our lives have shifted increasingly online, and digital assets are a form of personal property and part of a decedent’s estate, the rules around everything from privacy to copyright are a confusing mixture of state and Federal laws (primarily the Stored Communications Act and the Computer Fraud and Abuse Act, which both passed in 1986 with only minor revisions since). The challenge is that the prior legislation from the 1980s was primarily focused on protecting the user’s privacy and preventing unauthorized access to a user’s digital accounts, sometimes leaving estate executors with few options or an outright lack of authority to execute their duties with respect to digital assets (in fact, even with joint bank accounts online, an online bill pay service is typically tied to a specific user’s account, potentially even limiting a surviving spouse’s access to see what bills the other account holder is/was paying!). Fortunately, a prospective solution is in the works, being drafted through the Uniform Law Commission to create a uniform state law that could be adopted across the country, called the Fiduciary Access to Digital Assets Act (FADAA). The primary purpose of FADAA would be to vest fiduciaries with “the power to access, manage, distribute, copy, or delete digital assets and accounts”, whether executors of an estate, conservators for a protected person, agents under a power of attorney, or trustees. Unfortunately, though, it will still take time to draft the legislation, make sure it doesn’t conflict with any Federal laws (or the courts might declare the Federal law trumps any new state law), and then ultimately pass it in all 50 states. Nonetheless, after working on FADAA for over a year already, the Uniform Law Commission is expected to vote on a proposed version of the law in July, and if approved a final version will be available to states in the summer, and will hopefully begin to get enacted by at least a few states shortly thereafter.

How To Generate Leads With Social Media – This article by financial planner and experienced social media user Ted Jenkin of oXYGen Financial makes the key point that for advisors to succeed and generate leads and prospective clients on social media, that the social media tools should be a means, and not an end. The end is actually the advisor’s website, which should be set up to create and capture leads – and that means more than just having a “Contact Us” button in the corner of your website! Instead, visitors to your website should see something that makes them want to engage – such as a free e-book or free webinar, with a button that will make them want to enter their information in order to your information. Accordingly, this also means that for social media activity to be successful, it must lead prospective clients back to your website, where this “lead capture” activity happens. Does the content you share on social media include – at least occasionally – something from your website that would be valuable to click on and check out? If someone finds your LinkedIn or other social media page, is there something to engage them and bring them back to your site? Jenkin also notes that in the end, if you’re trying to build your business with social media, it’s important to keep the eye on the ball, which means don’t just focus on “likes” or “impressions” that don’t create revenue and look instead to the results that do create revenue and matter for your business: what gets you prospective and actual clients?

Can Financial Advice Fit in an Algorithm? – In this article for Morningstar Advisor, financial planner and “Behavior Gap” author Carl Richards provides his own take on the emerging rise of ‘robo-advisors’ and automated investment platforms like SigFig. And while the opportunity may seem appealing for consumers to use such platforms to inexpensively find low-cost funds, build diversified portfolios, and align them to risk tolerance, Richards suggests that it’s not quite yet time for advisors to just throw in the towel. After all, the reality is that in the end, robo-advisor services are still investor controlled, which means investors can still choose to turn them out at the worst possible moments (e.g., in the midst of a scary bear market). While it’s nice for investors to have control when times are good, Richards wonders “what will stop investors from turning off the robot and making an emotional decision about their investments” when the bad times come, and will an algorithm alone really help a human being deal with irrational behavior? That being said, Richards notes that the robo-advisor tools are something that can potentially make advisors and investors better at their job; in other words, robo-advisor tools may not be about to replace you as an advisor, and instead can be an opportunity to open up a meaningful conversation about what the online tool reveals… and if robo-advisor tools can help advisors have better and more meaningful conversations with clients by highlighting key issues and concerns and allow us to help our clients with their behavior, isn’t that a good thing?

Betterment Institutional Is Born – This week was the high-profile Tiburon CEO Summit, which often is the place that big announcements are made, and this time was no exception: at the conference, Fortigent and also Convergent Wealth Advisors founder Steve Lockshin revealed his latest project: a Betterment Institutional offering set to roll out on June 1st, that will bring the Betterment “robo-advisor” solution directly to financial advisors who want to use the platform. In essence, Betterment Institutional will be a form of TAMP (Turnkey Asset Management Platform), but with a heavy focus on the “turnkey” part, including going directly to a clearing platform to save on cost, and integrating deeply with additional technology solutions including Wealthbox CRM. Leveraging the low-cost Betterment platform in the first place, Betterment Institutional is aiming to deliver its services for “about 35 basis points” all-in, including both the core Betterment investment management service and the additional Institutional overlay/services. As noted by yours truly (in both the article, and previously on this blog), the Betterment Institutional shift appears to be recognition from Betterment that advisors are not competition, but instead can be allies in pairing together standalone comprehensive financial planning advice and a low-cost investment solution; accordingly, the article also notes that the new XY Planning Network (aiming to provide financial planning for ongoing monthly retainer fees) is in talks to partner with Betterment Institutional. The Betterment Institutional offering threatens to disrupt some of the traditional custodian and technology platforms for RIAs; however, as Orion Advisor Services president Eric Clarke points out, adopting Betterment Institutional would require advisors to move their assets to Betterment’s clearing platform (Apex), and larger advisory firms may find that tools like Orion are actually still much less expensive when calculated as a basis point charge.

In the meantime, if you’re interested in more news and information regarding advisor technology I’d highly recommend checking out Bill Winterberg’s “FPPad” blog on technology for advisors. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read “FPPad Bits And Bytes” on his blog!

Catch Up On A Few Of Our Other Recent Weekend Reading Article Highlights!